A recent column discussed the historical context for the emergence of intellectual property as the new and most important valuation of a company. While this point of view is becoming more main stream every day the current problem is that there is no liquid market that can help determine actual valuations.
Corporations and individuals can easily monetize their real estate holdings, their heavy and office equipment and just about any hard asset they have. As stated in the prior column, 80% of the value of the S&P 500 companies is their Intellectual Property, or IP. There are all kinds of markets to monetize the remaining 20%of a company’s assets, but what about the IP?
Last week I was witness to the beginning of the answer to this question. If you believe, as I do, that IP is becoming the dominant asset in commerce in this new century, then last week’s activities in Chicago will be looked upon as significant. The company mentioned in the earlier column, Ocean Tomo, had two days of meetings for IP specialists from around the world. I attended two events that were of great interest and suggest the coming future of the IP marketplace.
The first event was a ‘town hall’ meeting on two major proposals: creating a Intellectual Property Enterprise Zone, and establishing and Intellectual Property Exchange. The Enterprise Zone, developed with the help from the Chicago Chamber of Commerce, the City of Chicago and the State of Illinois, would be a physical place that would be a marketplace dedicated to technology licensing and IP monetization. As envisioned, the Zone would be a facility that would have offices for more that 100 corporate IP professionals from companies with substantial IP portfolios. The idea is that physical proximity, familiarity, and an ongoing effort by professionals to value IP through transactions will establish a new playing field. Given the huge value of company’s IP assets, maintaining a small office and a small staff of one or two in Chicago to help monetize IP should not be an issue. This is one of those ideas that is so simple yet profound that one wonders why it currently doesn’t exist.
The Intellectual Property Exchange is more complex and is basically the establishment of a new IP based financial market. The establishment of this exchange would allow the trading of a wide range of IP-related products such as IP related indexes, futures and options, IP backed bonds and patent-rich company IPOs. This entire exchange would be building off the new Ocean Tomo 300, an index of IP rich companies that was launched late last year and is traded on the American Stock Exchange. Obviously the Exchange is a much more complex entity to launch than the Zone. The planned launch dates are Summer 2008 for the Zone, and early 2010 for the Exchange.
During the Town Hall meeting, Professor James J. Angel from the Georgetown University Graduate School of Business, an expert on the history of markets and financial markets made a presentation that was straightforward and compelling. Some highlights from his presentation that are worth noting. IP in the world has an estimated value of $5.5 trillion. This number includes patents from such patent heavy industries such as pharmaceuticals, technology, energy extraction and manufacturing, not to mention copyrights on such things as movies, books and Internet properties. Like real estate, IP is illiquid and each piece is different, yet unlike real estate there are few traded financial instruments that have IP as the underlying asset. While there are a great number of financial exchanges in the world, there are no IP exchanges. Professor Angel suggested that, during the course of history, markets have been created to facilitate trade of all kinds, and that such markets were created when the time was right. I concur with his conclusion that now is the historically right time to create an IP financial marketplace.
It is interesting to note that Sears, a quintessential Industrial Age retailer, has just secured a $1.8 billion bond with the IP from theCraftsmen, Kenmore and Die Hard brands.
Later that same day, Ocean Tomo held their third live IP auction. With hundreds of people in attendance, and obviously motivated bidders on the phone, the auction was exciting and lively. In the first hour the world record of $1.4million for a patent, set at the last Ocean Tomo auction, was broken, with a successful bid of $2.75 for a patent covering “various methods of communicating, managing and storing data” for digital and home media. Fifteen minutes later there was a winning bid of $2.6 million for “matching first and second mobile communications devices”. While a number of lower priced patents did not sell, the general trend was rapid and aggressive bidding. These prices for IP, as the prices in the world of art auctions do for art, serve as benchmarks for the valuation of IP worldwide. Unlike car or art auctions, where you can see the physical merchandise, what the audience was shown on large screens, were patent schematics, largely unintelligible to this viewer. It is a new world.
To get a better perspective on this new world, I hope to soon interview the Founder and President of Ocean Tomo, James Malackowski, and will provide that to you here. I personally think that the creation of liquid markets for Intellectual Property is one of the most significant and historically timely developments in the world today. Twenty years from now the financial world will look back and acknowledge that this was the beginning of a new stage in the financial history of the world.